Dep't of Revenue v. Sedgewick, TC 5341
| Decision Date | 29 July 2020 |
| Docket Number | TC 5341 |
| Parties | DEPARTMENT OF REVENUE, State of Oregon, Plaintiff, v. TERRENCE SEDGEWICK and SUSANNAH SEDGEWICK, Defendants. |
| Court | Oregon Tax Court |
Defendants ("Taxpayers") purchased certain amounts of an Oregon income tax credit commonly known as the Business Energy Tax Credit ("BETC") from one or more third parties at a discount and used the BETC to offset their Oregon personal income tax liability in three consecutive years. Plaintiff Department of Revenue (the "Department") adjusted Taxpayers' returns to include as taxable income the difference between the amount of BETC they had used as a credit and the amount they had paid for the BETC.
In response to notices of assessment asserting additional tax due, the substantial understatement penalty, and interest, Taxpayers timely filed a complaint in the Magistrate Division on May 2, 2017. The Department appeals from the magistrate's decision concluding that Taxpayers did not have gain constituting gross income when they used their BETC. The parties have filed cross-motions for summary judgment on stipulated facts. The tax years at issue are 2012, 2013, and 2014 (the "Subject Years").
The material facts are not in dispute. At all relevant times, Taxpayers have been Oregon residents and have filed joint Oregon personal income tax returns as spouses in a marriage. (Stip Facts ¶ 1 at 2.) Taxpayers purchased three Oregon BETC certificates over the course of several years, each time for a discounted purchase price that was 33 percent of the amount of credit they would be allowed to use. The Department does not contend that the discounted purchase price deviated from the statutorily defined "present value" at which BETC was required to be sold. See ORS 469B.148.1
During each of the Subject Years, Taxpayers filed a return (for the preceding year)2 on which they used portions of the purchased BETC to offset their tax liability (for that preceding year). In computing their Oregon taxable income for each Subject Year, Taxpayers did not include in their taxable income any amount attributable to their use of BETC on the return for the preceding year. In other words, Taxpayers did not treat the act of filing the preceding year's return on which they used BETC as triggering gain or other income for the tax year during which they were filing the return.
On their federal income tax return for each Subject Year, Taxpayers reported an itemized deduction for state taxes that included an amount that they explained was attributable to their use of the BETC.
Did Taxpayers realize gain when they used an amount of BETC to offset their Oregon income tax liability?
Until the legislature phased out the BETC program around the time of the Subject Years,3 Oregon law allowed a project owner4 proposing to construct and own an "energy facility"5 to apply for the BETC as a credit against Oregon income tax liability. The BETC was a percentage of the "certified cost" of the project, and it generally was required to be claimed6 over a period of five years. See ORS 315.354(1)(a), (c). The amount of BETC available for a project could be substantial, depending on the type of project and the amount of certified costs. One frequently used variety of BETC could range up to a total of $10 million in BETC per project. See ORS 469B.142(1)(a) (); ORS 315.354(1)(c) (). If the Oregon income tax liability of the person holding the BETC was insufficient to absorb the amount of credit available for a particular year, the holder could carry the excess forward for use in the next succeeding year, up to eight years. ORS 315.354(6).7 However, the BETC was "nonrefundable," meaning that the holder could not receive any part of its value in the form of acash payment from the state. ORS 315.354(1)(a)-(c) ().
The application process required two major steps. First, before starting construction, the person proposing to construct and own the facility was required to apply for "preliminary" certification for the BETC based on estimated total costs. See ORS 469B.145. The Oregon Department of Energy ("ODOE") was required to undertake a technical review, for example, to verify the availability of the renewable resource, the proposed electrical generation capacity, and the existence of necessary permits. See ORS 469.205(2) (2007); OAR 330-090-0130(4) (2008). Legislation and rules applicable to more recent facilities added job-creation and verification requirements with which an applicant for preliminary certification must promise to comply. See ORS 469B.145(2) (). The applicant was required to indicate whether it planned to transfer the BETC but was not required to immediately identify a transferee. See OAR 330-090-0130(8) (2008).
Second, at the time of completion, the project owner was required to apply to ODOE for "final" certification based on actual costs and undergo a second technical review based on actual data. See ORS 469B.161(2). The function of a final certificate was to substantiate that the facility had "received final certification" from ODOE and that the person shown on the certificate was entitled to use the credit to offset tax liability. See ORS 469B.167; ORS 315.354(3)(b). When applying for final certification, the project owner could choose, by default, to receive a final certificate for the entire amount of the BETC in the name of the project owner. Alternatively, the project owner could ask ODOE to issue the final certificate to a"transferee"8 by providing ODOE proof that the transferee had paid the project owner the present value of the BETC in cash. See OAR 330-090-0130(10)(b)(ii)(I) (2012).9 This feature enhanced the BETC's usefulness to developers of large, capital-intensive energy conservation projects such as wind or solar farms that might take years to generate Oregon tax liability due to large initial deductions for project costs.10 Oregon law allowed only the project owner at the time of completion to "transfer" the BETC in this manner; there was no mechanism for that first transferee to make any further transfer. See ORS 469B.167; see also ORS 315.052 (). Only the person named on the certificate could claim the credit. See ORS 469B.167(1)(a). Oregon law also set the discounted lump-sum price for the transfer of a BETC at its "present value," as determined periodically by ODOE. See ORS 469B.148.11
/ / / Once the final certificate or certificates were issued, the same set of rights generally applied, regardless of whether the certificate holder was the project owner or a transferee. Both kinds of holders acquired the right to use the BETC to pay their Oregon personal or corporate income tax liability. Both kinds of holders had the right to exclude others in the sense that only the person named on the final certificate could claim the credit. Both kinds of holders were subject to the same requirement to claim the BETC over a five-year period, although the five-year period might start in a later year for a transferee than for the project owner, depending on the date the transferee paid for the credit. See ORS 469B.167(1), (2). Both kinds of holders bore the risk that Oregon income tax liability might prove too small to use the entire credit in any of the five years (plus carryforward). This meant that the expected benefit from the BETC could fail to materialize if the holder were to suffer a business downturn, move to another state and cease to have Oregon income, or in the case of an individual holder, die.
The rights of a project owner and a transferee differed significantly with respect to revocation: ORS 469B.169(1) allowed ODOE to revoke a BETC certification if obtained by fraud or misrepresentation, if the facility was not operated in compliance with the certification procedures, or if it ceased to operate. However, a BETC held by a transferee could not be revoked. See ORS 469B.169(6). These provisions reflected the differing obligations of a project owner and a transferee. The transferee was not required to have any connection with the project or the project owner. The project owner bore the risk that no transferee would be found by the time the project was complete, inspected, and ready for final certification. The transferee's only obligation was to pay, in cash, the administratively determined present value of the amount of credit the transferee wished to use over the five-year period.
Oregon imposes tax on the "entire taxable income of every resident of this state." ORS 316.037(1)(a). "Taxable income" means "taxable income" as defined under federal law, subject to Oregon-specific modifications not at issue here. ORS 316.022(6); ORS 316.048. Section 63 of the Code12 defines "taxable income" as "gross income" minus deductions. Section 61 defines "gross income" as "all income from whatever source derived, including * * * [g]ains derived from dealings in 'property[.]" IRC § 61(a)(3) (emphasis added). "Gains from dealings in property" are computed according to Section 1001(a):
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